5 Tips to Save Money on Taxes

Consider these tips to make sure you don't waste money rushing to get your return in before the deadline.

From MSN.com:

File on time. Even if you can't pay all your taxes, you should file a return or an extension to avoid the penalty for not filing on time. Death, by the way, is not an excuse for missing the deadline. As executor of an estate, I filed two years of tax returns for a deceased relative. Because I filed those returns after the deadline, the deceased (actually her estate) was assessed a penalty.

Take advantage of free online filing options. Yes, you can buy tax software, and if you have a complicated return, you may need it. But if you made less than $58,000 last year, you can use Free File, a partnership between the IRS and vendors of tax software. Each company has slightly different rules. If you made more, you can use free IRS online forms.

Get free in-person help. Organizations from AARP to the IRS provide free help to taxpayers at sites around the nation. If you made less than $49,000 last year or you're over 60, volunteers will prepare your tax returns for free, so why pay someone to do it?

Find a good accountant. If you have a complicated tax return, paying an accountant or enrolled agent may save you more in taxes than you pay in fees. Just because you can do your own taxes doesn't mean that you should. Hiring a tax pro could save you not only time and money, but your sanity and your marriage. Not all tax preparers are equal and fees vary, so be sure to check out any pro you consider.

Keep good records. The tax code provides all kinds of deductions, from business mileage to energy tax credits. But you can't deduct mileage you've forgotten. That's why it's important to set up a system for the records you use to prepare your taxes. Consider a mileage log in your car, an online or computer accounting program or an old-fashioned envelope system. How you keep the records doesn't matter. What matters is that you have all the information when it's time to do your taxes.

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Getting Help With Your Tax Return

Tax season is here in full swing, and last week the IRS announced that all taxpayers (including those who itemize) are now free to file their returns. Fewer than 20% of Americans prepare their returns without a tax professional or software. For everyone looking for help this tax season, take heed the following tips. If you can think of any not included below, let me know via Twitter (@RoniDeutch).

1. Do Not Delay

The April deadline may seem far away, but you really only have a few weeks to get your return prepared. If you have not yet thought about your taxes, I highly recommend getting your financial documents together as soon as possible. The longer you wait, the busier tax preparation offices get, and it is no fun running around desperately trying to get help with your return at the last minute.

2. Call a Roni Deutch Tax Center

There are dozens of Roni Deutch Tax Center locations across the country, to find one near you, head over to RDTC.com/locations. No Roni Deutch Tax Center in your neighborhood? Not to worry, many stores offer over the phone tax preparation services. Meaning you could get your tax returns filed without having to leave the couch!

3. Ask a Friend or Family Member for Help

Do you have a friend or family member who is a certified public accountant or a tax preparer? Or maybe someone who just happens to be familiar with federal and local tax laws? By asking around you might be able to get help filing your returns with a “friends and family discount.”

4. Ask for a Referral

If none of your friends or family members can help you file your return, you can always ask who does their taxes. You’ll be more comfortable than finding someone out of a phone book and many tax offices offer referral programs. It’s a double whammy: you get quality tax help and your friend might score a discount!

5. Own a Business?

Business taxes are more complicated, so if you run a small business and do not already have a tax person, I would recommend asking other business owners in your community for a referral. It is critical that you find a business-savvy tax professional to ensure you do not pay the IRS any more in taxes then you have to. If you do not know any other business owners in your area, try going to a local chamber of commerce meeting to ask for referrals.

6. Look Up Reviews Online

The internet is awash with people who want to prepare your taxes. To help you sort the good from the not-so-good, you should be able to find some relevant user reviews. One or two negative reviews in a sea of positive shouldn’t scare you off. On the other hand, if you find more negative than positive reviews, this might not be the tax professional for you.

7. Ask For an Estimate

I recommend always calling potential tax preparers and asking for an estimate over the phone. While rates vary based on how complex your taxes are, an estimate should be easy enough for a professional to provide.

8. Make an Appointment Today

If you decide to hire a professional to prepare and file your return, you should try to make an appointment today! Tax professionals are swamped during tax season. If you procrastinate too long, you’ll run out of time and will be on your own. And that’s an unpleasant situation to find yourself in on April 15.

IRS Answered Only 8.8% of 352,758 Telephone Calls From Deaf Taxpayers

According to a new report from the Treasury Inspector General for Tax Administration, the IRS exceeded toll-free telephone assistance goals, but provided the lowest level of service to deaf taxpayers since 2003. I have included a section of the report below (Toll-Free Telephone Access Exceeded Expectations, but Access for Hearing- and Speech-Impaired Taxpayers Could Be Improved), courtesy of the TaxProf Blog.

During the 2010 Filing Season, the IRS exceeded its key toll-free telephone assistance performance measurement goals. However, hearing- and speech-impaired callers that used the IRS Text Tele-typewriter/Telecommunications Device for the Deaf (TTY/TDD) telephone line experienced a low Level of Service and had difficulty reaching an IRS assistor...

The Level of Service for the TTY/TDD toll-free telephone line for the 2010 Filing Season was 8.8%, the lowest Level of Service since the 2003 Filing Season when it was 6.2%. The TTY/TDD product line Level of Service has consistently provided the lowest Level of Service among all of the Customer Account Services Enterprise product lines.

Tax Tools and Financial Calculators

RoniDeutch.com has a NEW LOOK! It also has also been updated with LOTS of helpful tax tools and calculators. We had them designed to assist taxpayers with their financial and tax planning strategies. I have listed the names of a few of our new calculators below, but check out RoniDeutch.com to try them out!

Should I pay down debt or invest more?

What is the impact of increasing my 401(k) contribution?

How much should I be saving for college?

How much can I contribute to an IRA?

What is the impact of early withdrawal from my 401(k) plan?

The Tax Implications of Divorce

This morning a new entry explaining the tax implications of divorce was published on the Roni Deutch Tax Center – Tax Help Blog. As the article explains, our complicated tax system can often make stressful situations, such as a divorce, even more stressful. I have included a segment of the article below, but to learn more about the tax implications of divorce, check out the Roni Deutch Tax Center – Tax Help Blog.

Tax Filing Status

Even if you spent most of the year married to your partner, if you become legally divorced on or before December 31st, you will not be eligible to file a joint return. Therefore, if you are in the process of getting divorced, which will not finalize before the end of the year, you will need to file as a married taxpayer (either a joint or separate return). If you and your former spouse are on good terms, you should try to discuss tax planning as it related to your divorce. Additionally, if you are unmarried and your spouse was not a member of the household for at least six months of the year, and you have a qualifying dependent, you may be able to take advantage of the head of household filing status.

Child Custody and Tax Exemptions

If you had children with your ex-spouse then a whole new set of tax complications may emerge depending on the specifics of your child custody arrangements. If one parent is required to make child support payments, that parent will not be able to deduct the payments on a federal return. Additionally, child support payments are not considered taxable income for the parent receiving the payments. The parent has majority custody can also claim the children as dependents, and benefit from the resulting tax incentives.

Living Situation

A home is often the most expensive purchase a taxpayer will make in their lifetime, and can result in serious financial issues during a divorce. You and your former spouse will undoubtedly need to decide what to do with the property after the divorce is finalized. One ex-spouse may decide to continue living there, possibly with dependent children, or you may decide to sell the home and split the proceeds. If you do sell the home, and profit from the sale, then you will want to reinvest those funds within two years to avoid the capital gains tax.

Divorce and Attorney Fees

There is a small category of attorney fees may be deductible expenses on your tax return. For example, although, the legal fees for the divorce itself are not deductible, legal fees related to estate planning due to a divorce may be. To be on the safe side, you should ask your attorney to divide the bill into non-deductible charges, tax-deductible alimony charges, and property settlement charges. By doing this, we will be able to help your tax preparer have sufficient proof to claim the tax deductible fees on your return.

Continue Reading…

IRS Provides Tax Help, Guidance to Gulf Oil Spill Victims

Over the weekend, the IRS published a new press release with guidance for individuals and businesses affected by the oil spill in the Gulf of Mexico and announced a number of new efforts to help affected taxpayers, including a special Gulf Coast Assistance Day on July 17.

“This is a very difficult time for many people affected by the oil spill in the Gulf of Mexico. As residents of the region cope with the evolving situation, I want to assure them that the IRS will be doing everything it can to provide tax help to those who need it,” IRS Commissioner Doug Shulman said. “We encourage anyone who has an issue with the IRS to contact us and explain their hardship, and we will work with them to find a solution. We’ll do everything we can under current law to help taxpayers.”

The guidance released today is based on current law, and it explains how recipients of payments from BP should treat the payments for tax purposes. According to the current law, BP payments for lost income are taxable in the same way that the wages or business income these payments are replacing would have been. The law treats compensation for lost wages or income differently for tax purposes than compensation for physical injuries or property loss, which generally are nontaxable.

Every person can have unique financial circumstances, so the IRS encourages taxpayers to review their tax situation or talk with their tax preparers about the implications of payments or compensation from the oil spill.

The new information is available in a question-and-answer format on a special section of the IRS website, IRS.gov. The IRS is closely monitoring the situation in the Gulf, and additional information will be added to IRS.gov as it becomes available.

Taxes and Identity Theft

Last week, the RDTC Tax Help Blog posted a new article on tax related identity theft. You can find a section of the article below, or click here to view the full text.

Now that tax season is here, people across the country are worrying about getting their tax return prepared and filed with the IRS. However, there is another issue that taxpayers have to worry about: tax-related identity theft. Fortunately, you can prevent becoming an identity theft victim by following a few instructions. The good news is, even if your identity is stolen the IRS will work with you to resolve the matter as quickly as possible.

Increased Risk

A few years ago, Nina Olson, the National Taxpayer Advocate made the startling revelation that between 2004 and 2007, the number of tax-related identity theft problems rose by 644%.

Erroneous Returns or Stolen Refunds

If you get a notice from the IRS indicating that more than one return was filled using your social security number (SSN), you will want to contact them immediately to find out if you are a victim of identity theft. Using erroneous returns, thieves can obtain refunds from the IRS in your name, a common tactic used by tax scammers. The IRS will work with you to resolve the problem, but it is important to contact them as soon as possible.

Continued at RDTC.com…

Top 10 End of the Year Tax Planning Tips

Although you may be used to waiting until April to worry about your taxes, this could be a big mistake. Many tax breaks are secured through actions taken before January 1. And guess what – it is already November and the holidays are just a few weeks away! So, you need to take advantage of the pre-Thanksgiving lull to get your tax situation in order to maximize your tax savings come next April. And as you can see from the following paragraphs, there are plenty of things you can do now to make the upcoming tax season a little less stressful—and a finacially successful one.

1. Make Upgrades

If you were thinking about making energy efficient upgrades to your home, you may want to do so before the New Year. The deductions and credits available for energy efficient home upgrades are larger this year than they were in 2008, and it is unknown if Congress will extend or decrease those credits for 2010. For more information on this year’s “Green” tax incentives, check out this entry I posted earlier in the year.

2. Give Now

During the holiday season, most of us feel more charitable then usual, with toy drives for underprivileged children and Santa Clauses asking for donations on every street corner. However, this time of the year is also the last time you can make a charitable donation and deduct the amount from your 2009 taxable income. Be sure to take a minute to look over your donation receipts from this year so far to see if you making a few extra donations will significantly reduce your tax liability or not.

3. Make 529 Contributions

If you have children, then you might want to consider opening a 529 plan, or if you already have one setup then you could max out your contributions. There are two different types of 529 plans, but both have significant tax benefits. Using any extra funds you have at the end of the year to help pay for future college bills is a great, and tax friendly way to prepare for the future. To learn more about the different 529 plans check out this RDTC Tax Help Blog entry on tax friendly ways to save for your children’s education.

4. Offset Large Capital Gains

If you had a high amount of capital gains related income, then you may want to offset your profits by selling off a few bad investments or stocks. You can then claim a capital loss and reduce your taxable income. However, keep in mind there is a $3,000 limit—but the rest can be carried forward into future tax years. Alternatively, you can offset your losers by selling off some winners. If you are not experienced with capital gains and losses, then I highly recommend seeking the help of a qualified professional.

5. Non-Charitable Gifts

It is the season of giving, right? In addition to charitable contributions you can also give up to $12,000 ($24,000 for a married couple) to as many individuals as you wish without incurring a gift tax penalty.

6. Get in Order

With the New Year just around the corner, it is never too early to begin getting your financial records organized for next tax season. By knowing exactly how much money you have made this year, and projecting your total taxable income for the end of the year, you can decide if you need to take any actions concerning income and expenses to further lower your tax liability or not. You can also throw away any files that are old or unnecessary, and create a new folder in your filing cabinet for 2010.

7. Adjust Withholdings

If after reviewing your taxable income, you realize that your tax bill will be higher than you had expected, now is your last chance to have your employer adjust your withholdings. It will mean less cash in your remaining paychecks for the year, but at least you will not be hit with a massive tax bill come April. On the other hand, if you have overpaid your taxes throughout the year then you could lower your withholdings and get a little extra holiday cash.

8. Prepay Mortgage and Taxes

If you are looking for ways to increase deductions and lower your taxable income, then you can always prepay your next mortgage payment, or pay your property taxes early. Just remember though that this means you will have one less mortgage payment to make next year, which will result in a higher tax bill in April 2011.

9. Retirement Payments

If you have not contributed the maximum to your 401(k) or another tax friendly retirement account, then you want to do so before the years end. This will help lower your taxable income, and is also a good investment in your future.

10. Deferred Income

Deferring income is one of the most popular end of the year tax planning tips, and it is actually pretty easy. If you are retired then you could postpone an IRA withdrawal, or if you are self-employed then you can easily defer a payment from a client. However, before you defer any income you want to be absolutely sure that you will be in a lower tax bracket next year. Otherwise you could just be postponing a large tax bill.

Year Round Tax Planning Tips

Last week the Roni Deutch Tax Center – Tax Help Blog posted a new article discussing some year round tax planning tips. As the blog entry explains, even if you are a regular wage-earning employee and do not have to worry about making quarterly payments, you should still get in the habit of thinking about your taxes all year long. It will make tax season less stressful, and by planning your finances in advance you can keep your tax liability as low as possible. Below is a snippet of the article with some fall tax tips, but be sure to check out the full entry at RDTC.com.

Fall (September – November)

When your children go back to school and the leaves start falling from the trees, you need to start thinking about taxes. The year is coming to an end, and if you have a steady job then you should have a pretty good idea about what your total income is going to be for the year. Once you calculate your yearly income, you will know what tax bracket you fall in, and can make any necessary adjustments to your withholdings. If you have not paid enough, you can have your employer take out additional taxes from your paycheck. It will mean less money each month, but it sure beats having to pay the IRS a large payment in April. On the other hand, if you have overpaid your taxes then you can lower your withholdings and get a little extra holiday season cash.

The fall months are also your last chance to make any longer-term tax moves that cannot be made last minute come December. For example, if you plan to make a large charitable donation, then you will want to make it now so that you can make sure you get proper receipts and documentation. Finally, if you are trying to buy a house and take advantage of the $8,000 Federal tax credit then you are going to want to make sure you close escrow during the fall months. The credit expires on December 1st, and is unlikely to get extended into next year.

iPhone as a Tax Gadget?

One of my favorite bloggers, the Tax Guru, published a great blog the other day on how many people are beginning to use iPhone apps in order to prepare for tax season. Most of us are used to using programs like QuickBooks to monitor expenses, but as mobile applications become more and more advanced the idea of managing your finances with your cell phone is becoming a reality. Check out the following blog entry from the Tax Guru, or click here to see Mint.com’s list of the top 10 finance iPhone apps.

I don't have an iPhone and have no plans to get one; but as a life-long gadget freak, I have been intrigued by the growing list of applications being developed for it. In the latest Intuit newsletter, I just saw an ad for this app called Tap2Track Mileage that is supposed to use the iPhone's GPS capability to keep a log of vehicle trips that can produce an Excel spreadsheet that will be very useful at tax time.

This reminded me of a much more complicated gadget that was available in the mid 1980s for logging vehicle miles. That contraption required installing magnets onto the vehicle's drive shaft to record mileage on a device inside the vehicle, producing a paper listing of miles driven for business, medical and charitable purposes. If I remember correctly, that product sold for around $500; much more than the $3.99 this new app sells for.

Your 1040 Tax Form Really Is A Treasure Map

Most Americans are afraid of doing taxes, and think their Form 1040 is booby-trapped. And that just isn’t true! With a little knowledge and a shift in perspective, you might find that Form 1040 is actually a treasure map, riddled with hidden gems and golden nuggets. Each line is an opportunity to pay less in taxes. While you probably don’t qualify for all of these credits and deductions, I just bet that at least one will save you money come April 15.

Line 23. Educator Expenses

Educators working in Kindergarten through 12th grade can deduct up to $250 per year. Qualified Expenses include the cost of any educational material you might use in the classroom. And this deduction applies to teachers, aides, counselors, principals, and instructors working at least 900 hours during the school year. Even better, if you and your spouse are educators and you file jointly, that deduction bumps up to $500.

Line 29. Self Employed Health Insurance Deduction

Self-employed individuals who purchase health insurance can deduct the entire cost of the coverage. Of course there are some restrictions: the deduction can’t be more than the net profit of your business; and if you are covered by a spouse’s health care plan at work, you don’t qualify for the deduction.

Line 47. Foreign Tax Credit

Any income taxes you paid to a foreign country are allowed as a credit. Review your 1099 investment statements for any of these taxes, as these are often overlooked. Form 1116 does not have to be attached to the return if the foreign taxes paid are from interest and dividends reported on 1099 statements and the total is under $300 for single filers, $600 for married couples filing jointly. But, no double dipping! Foreign taxes you claim for the credit are not eligible for a refund from the other country.

And let’s not forget about Schedule A for those who itemize their deductions.

Line 5(a) State and Local Income Taxes Paid

You can deduct any State or Local income taxes you pay, whether from paycheck withholding or estimated tax payments made January 1, 2008 to December 31, 2008. If you make estimated tax payments, consider making your January payment early, before December 31, and it counts for 2008!

Line 13, Qualified Mortgage Insurance Premiums

We all know that mortgage interest is deductible, but you can also deduct your mortgage insurance premiums! Your lender reports the total insurance premium paid in Box 4 of Form 1098, sent out at year’s end.

Line 21 Unreimbursed Employee Expenses

The deductions here aren’t necessarily “overlooked” by taxpayers, but since this is a catchall for all employment-related expenses, people often forget some. This is where being organized saves the day. Be sure you include any job-hunting expenses, and union dues, and remember Form 2106, Employee Business Expenses must be filed with the return if you are including vehicle expenses, overnight travel and meals.

Line 23 Other Expenses subject to 2% AGI floor

The most common types of deductions on this line are investment expenses. But make sure you include any legal expenses associated with obtaining taxable income, custodial fees paid for a trust account, and casualty and theft losses on property used in performing services as an employee.

Taxes are nothing to be afraid of, especially when you think of all that “buried treasure” just waiting to be found!

10 Ways to Avoid Back Taxes this Tax Season

Follow these 10 simple steps to make sure you do not owe IRS back taxes after you file your tax returns this tax season.

1. Claim the right filing status

Make sure that you claim the correct filing status. Do not claim something different in order to get a bigger refund such as claiming "Head of Household" when you really should file as "Single". Alternatively, if you are married you should consider filing jointly to lower your total liability.

2. Make sure your math is correct

Always triple check the math in your income tax returns, even if you have them professionally prepared. For the most part the IRS will fix all simple math errors, but problems can arise if you have the wrong numbers listed for income or deductions that lead to an artificially inflated refund.

3. Include income from ALL sources

Make sure that you include income from all sources on your tax return. This includes regular wages, self-employment earnings, tips, independent contract work, child support, alimony, etc. Trying to hide income from the IRS is a big mistake as they have access to mass amounts of information and can determine your exact earnings for each year.

4. Remember winnings from gambling

All the money you win from gambling must be treated as income. However, you can deduct any money you lost at gambling from your total. For more information on taxes and gambling, check out “How to Accurately Reporting Gambling Profits & Losses To The IRS” on the RDTC Tax Help Blog.

5. Do not over exaggerate charitable contributions

In recent years, the IRS has been cracking down on taxpayers that abuse the charitable contribution deductions. Make sure that you only claim contributions that you can document with some type of proof. Also, do not over inflate the donation amount as excessive donations send a huge red flag to the IRS’s audit department.

6. Mail to the correct address, or e-file

Before popping your tax return in the mailbox, make sure that you are sending it to the correct address. If you mail your return to the wrong address it can get lost and result in unnecessary IRS fees or penalties. Fortunately you can avoid this potential problem completely by e-filing your return.

7. File on time, or request an extension

It is essential that you file your tax return on time or at least request an extension from the IRS. If you just ignore tax day then you will be unhappy when you realize what it will cost you. If you cannot file on time, visit “Need More Time to File?” on IRS.gov.

8. Forgetting to pay taxes on time

If you do owe money to the IRS then you must pay it before the April 15 deadline. Not paying does not mean your debt will magically go away. Instead it will begin accruing fees and penalties. To pay your taxes enclose a check with your tax return and write your Social Security number, tax form number and tax year on it.

9. If you notice any errors, re-file immediately!

If you notice an error on your tax return, you should file an amended return as soon as possible. If you wait for the IRS to catch your error then you will likely be faced with fees and penalties in addition to the owed back taxes.

10. Make immediate adjustments to withholding or estimated tax payments

Okay, okay, I will admit, this has more to do with 2008 than this year. However, after preparing, filing, and paying your 2007 federal income taxes, you need to take the information from the return and put it to immediate use. If you ended-up owing taxes, you need to adjust your withholdings and/or start making larger estimated tax payments. If you end-up with a very large refund, again, you may need to adjust your withholdings or estimated tax payments. That way you will receive that refund immediately in your regular paychecks. You could then take that money and put it to good use in wise investments or replenish your savings.

Also, if you do owe for 2007 and will need to work with the IRS at resolving your IRS tax debt (instead of paying in one lump sum), you will be required to make adjustments to your withholding and/or estimated tax payments. That is because the IRS is unwilling to work with taxpayers until they have taken steps to ensure that they will not owe again in the future. Higher withholding taxes and/or estimated tax payments are also allowable expenses, which is important in qualifying for some forms of IRS tax debt resolution (i.e. Offer in Compromise, Installment Agreements, Currently Not Collectible status, etc.).

December Tax Talk Today Topic: Filing Season

Recently the IRS’s website announced that the next Tax Talk Today will be on "getting Ready for the Filing Season 2008." It will broadcast on Tuesday December 11th and will "focuses on individual tax return issues, such as changes to forms, the latest tax law changes and IRS processing issues that affect individual taxpayers. Tax preparers also will get tips on how to avoid common errors that can cost them and their clients time and money."

Panelists will be Kathleen Collins, principal of her own Savannah, Georgia-based tax practice, and president of the Georgia Association of Enrolled Agents; William Stevenson, president of National Tax Consultants, Inc., a tax preparation and taxpayer representation firm for individuals and businesses; Pamela J. Walker, IRS deputy director for Submission Processing at Cincinnati and Carole Barnette, IRS acting chief for Individual Tax Forms and Publications.

For more information check out TaxTalkToday.tv

Now Open: RDTC Tax Help Blog

I am proud to announce that the official Roni Deutch Tax Center website, RDTC.com, added a new blog to its content. The new blog, the RDTC Tax Help Blog, is full of useful information for any one who needs help with modern tax issues. The blog features categories you would expect to find in a tax resource center (frequently asked questions, glossary terms, articles, etc) but in an exciting new blog format. So be sure to head on over to RDTC.com to check out the new blog!

Advice on Internal Revenue Service Audits

With the internal Revenue Service (IRS) making recent headlines about increasing the number of audits, it’s important for taxpayers to do what they can to avoid being audited. Although many experts point to the IRS’s public relations campaign on the new audits as reason to think it’s a scare tactic aimed at increasing voluntary compliance, getting audited by the IRS is never a pleasant experience and avoiding one in the first place is definitely the best option.
Having to pay more money isn’t the only unpleasant part of an IRS audit. Typically audits are a time consuming and aggravating process. An IRS audit isn’t like a criminal trial where some one is presumed to be innocent; the burden of proof lies on a taxpayer to prove there are innocent and filed an accurate tax return.

It is important to note that the IRS computer system selects the returns that are audited. No human employee reviews returns until they are selected for audit by the computer system. The computer system selects returns that are likely to yield the most money to the government. The computer system makes this decision by reviewing returns for “red flag” characteristics. Red flag characteristics are those income, deduction, and credit types that have historically seen the most imprecise calculations and abuse by taxpayers.

A taxpayer is more likely to get audited if he or she generates income from any source other than regular employment wages. Persons who file Form 1099 are up to three times more likely to receive an audit then some one who only files Form 1040. A 1997 IRS press release claimed more then three percent of taxpayers filing Form 1099 reporting between $25,000 and $50,000 of income were audited, compared with under one percent of 1040 returns that were audited.

Although the IRS offers hundreds of possible deductions and credits to help taxpayers lower their income tax liability, taking an excessively large amount will send a very clear red flag to the IRS. But how does a taxpayer know what’s excessive? That’s a tricky question. There is no all-applying rule because the IRS determines the allowable number of deductions for a taxpayer mostly based on their income. For example, if a person making $30,000 per year claims $15,000 in charitable contributions, then this will send a red flag to the IRS.

Although there are many tax laws allowing self-employed individuals to lower their liabilities by using home office deductions, taxpayers taking home office deductions are probably the most frequently contested by IRS because they are easy for a taxpayer to bend the truth on. In order to claim a home office deduction a taxpayer’s home office must be the principal place of business, meaning they perform most of their work in the home office. Also, the space must be used exclusively for running the business and not for personal use as well. Otherwise the space can’t be considered a home office and may not be deducted. The rules for home offices are very specific, so please be sure to read the IRS’s rules and regulations if your considering claiming a home office deduction.

Losses from a business can also be another red flag for the IRS. If an individual starts their own businesses for the purpose of generating excessive tax deductions, the IRS will catch on quickly. Businesses must be profitable in at least three of the past five years in order to be considered a legitimate business for tax purposes. Otherwise the IRS will realize the business is functioning as a tax shelter.

If there are big inconsistencies between your previous tax returns and your current return then you could be sending a red flag to the IRS. The most common examples are name changes (i.e. your name or the name of one of your dependents), claiming new deductions and credits, or a significant change in income. For example, if a taxpayer earned $75,000 one year, then only $15,000 the next, the IRS is going to wonder what happened.

If there are differences in the income you reported to your state treasury and to the IRS then the IRS will investigate as to why the information reported is inconsistent. Not only do federal and state authorities receive records of all sources of income and financial information for every taxpayer – the IRS does as well. If they notice any errors that point to misrepresentation of income then you can expect to receive a letter informing you of an audit.

If your reported income seems suspiciously low for your given life style, then the IRS will see this inconsistency and may request an audit. Remember that the IRS has access to all your financial records and will notice if you are making a $5,000 monthly mortgage payment but only receiving $2,000 a month in reported wages. They are going to know you must be receiving income from another source and will investigate.

If your tax returns are incomplete or sloppily prepared then this might also get the attention of the IRS. If there are blanks where there should be numbers or if most of the numbers you claim are round numbers (like $2,500 or $10,000) then this will also send up a red flag to the IRS.
There is no way to guarantee a taxpayer won’t be audited. However, if a taxpayer files an accurate tax return and avoid the IRS’s red flags their chances of being selected for an audit are much lower. Even if they are selected, having a clean and accurate tax return will help make the audit less cumbersome and intrusive.

IRS Summer Tax Tips

To help people with tax planning, the IRS has published Summertime Tax Tips to provide useful and information and advice on topics that affect millions of taxpayers. Though people don’t usually think about their taxes until closer to tax season, the IRS is encouraging taxpayers to take steps this summer to avoid potential problems. The IRS is publishing three tax tips per week. Topics range from how parents can get credit for sending their kids to day camp to using an online calculator to fine-tune your federal withholdings. You can see all of the tips at the IRS’s summertime tax tips page.

Expensive Tax Mistakes To Avoid

CNN.com has added a helpful article with advice on some expensive tax mistakes to avoid when preparing your tax returns this year. Some of their advice includes: avoid paying taxes with a credit card, avoiding refund anticipation loans, setting up an installment agreement, and paying on time. You can read the full article by clicking here.